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As per the usual, there is no lack of interesting things happening on the freight transportation and logistics front, whether it be the capacity situation for truckload shipping, the driver shortage or the impact of federal regulations on the supply chain and the bottom line, too. Logistics Management Group News Editor Jeff Berman recently caught up with Doug Waggoner, CEO of Echo Global Logistics, a non-asset based freight brokerage company and a provider of technology-enabled transportation and supply chain management services, on these topics and more. A transcript of the conversation between Berman and Waggoner is below.

Logistics Management (LM): How would you describe the current state of the freight economy?Doug Waggoner: It seems like the general economy is improving and capacity remains tight. We are also through the bad weather now so we are feeling optimistic about the rest of the year, too,

LM: Regarding capacity, obviously the weather made an impact. What are some other things that also did?Waggoner: The HOS rule took a little bit of capacity out of the system for a lot of carriers. It really depends on how carriers ran their network. On top of that, bad weather removed capacity from both the railroads and truckers so that exacerbates it. Also, the economic recovery looks to be above and beyond what we have seen for the last number of quarters and industry capacity was mostly in balance but close to the edge of it. Those three things pushed it over and things were also made more difficult by the inability of carriers to add capacity due to the driver shortage. These factors together, coupled with a tough first quarter, are in effect an anomaly as January and February are typically two of the slowest months of the year. Then you get into the second quarter and the beverage industry picks up as people are drinking more water, soft drinks, and beer and that demands more capacity. Produce season also takes capacity, too. Commerce typically builds in Q2 and Q3 through the peak, so I think the whole year is going to be tight. You are going to see rates go up and capacity is going to stay tight.

LM: What about the impact of Electronic Logging Devices down the road?Waggoner: That could very well be the straw that breaks the camel’s back as it will force everybody “to play by the same rules.” The big carriers play by those rules today and already use ELDs and the smaller carriers don’t. When those small carriers have to play by the same rules, it will take a lot of capacity out of the system, even more, I believe than HOS has.

LM: Given all the things you have mentioned, they have been largely favorable for carriers, with pricing power on their side. Is that likely to be the case for the foreseeable future?Waggoner: Yes, absolutely.

LM: This past winter was one like no other. What did you experience based on the winter’s impact on a company level and what were some lessons learned from it, too?Waggoner: There certainly were a lot of service failures, which are really beyond the control of asset-based truckers and although it is a disappointment to shippers and consignees when their freight does not get picked up or delivered on time. They certainly understand when those same weather conditions affect them personally so, generally speaking, yes, the weather caused a lot of service disruptions but people understand it. It is sort of like the fuel surcharge. People see the price of gas when they fill up their own cars so when the fuel surcharge goes up they likewise understand it.

LM: How do you view spot market conditions at the moment? February in particular saw some incredibly high spot market rates for flatbed and dry van.Waggoner: That ties directly to the capacity shortage, with the larger shippers that run routing guides have awarded lanes to carriers and brokers when they suddenly cannot get capacity and then turn to brokers in the spot market. Brokers have a much bigger rolodex of carriers so if I am a Fortune 500 truckload shipper and have got 100 carriers that are assigned to different lanes…when those 100 carriers cannot supply me the required capacity, I go to brokers that have tens of thousands of carriers.

LM: The brokerage market has a lot of players like Echo, C.H. Robinson, TQL and others. They are all well-run companies with some overlap, too as the market is crowded. As things stand, is there enough freight for everyone and what are some of the challenges of being a player in such a crowded market?Waggoner: It has always been crowed, there are thousands of brokers. There are no new brokers now, as opposed to the consolidation of existing brokers. It is not as if we are competing against new people. Instead, it is more of the big getting bigger. With that, things get better as it is a business of scale. As Echo gets bigger, it gets better and the same goes for the others. It will make it tougher for the little guys to compete, but we compete with Coyote, C.H. Robinson and XPO every day and still grew 17 percent last year and they are growing, too. It is a huge market. There are lots of niches in it and lots of customers so big that they use all of us as they need the capacity and the solutions. You are not really seeing any new entrants into the market, just a consolidation of existing players. It does not really even affect us, and I think you would probably hear the same from our competition.

LM: Are you finding that more shippers prefer the brokerage model as opposed to doing the same thing in-house and securing capacity on their own?Waggoner: That is happening. If you look at data from Armstrong and Associates, you will see that outsourced transportation is growing faster than the overall transportation market. Brokers benefit when they achieve scale through their size, and it is that same principle that makes a broker valuable to a shipper. This is because a shipper cannot do that as well as a broker as they just don’t have the people or relationships to buy capacity effectively in a tight market.

LM: How do you see things shaping up in the intermodal market?Waggoner: The first quarter was tough for intermodal as there was a shift of freight from trains to trucks. In bad weather, the railroads have to run shorter trains, which means they have less capacity and service was impacted in the first quarter pretty dramatically as trains go slower in bad weather. There was definitely some disruption in the intermodal market in the first quarter and I expect that to recover in the second quarter.

LM: Echo has already made two acquisitions in 2014 and is typically very active on the acquisition front in terms of growing through acquisition. Will that continue going forward?Waggoner: Yes. We have done 18 tuck-in acquisitions so far back to 2007 and have a pipeline we are working out of and expect to do more this year. We like the strategy because it is relatively low-risk and quick to integrate the acquired companies into Echo. We can add geographic presence, existing customer relationships and sales force, and it is a nice way to grow. Plus we have an experience in which once we acquire a company, typically within two or three years they double in size under Echo as we can help them grow faster and can them additional transportation loads to sell and give them our air price and contractual transportation management solutions to sell and we have had great success in turning acquired growth into organic growth as the acquired companies have grown under the Echo banner. We like that strategy and have not done any game-changing acquisitions, as those are the ones that have more risk. That is not to say we would not do one of those but have not at this point.

LM: The driver shortage situation does not look like it is improving. There is a dearth of younger entrants, too. How should it be viewed?Waggoner: I think it is a huge problem and a scary thought about where it is all headed. The average driver age is 51 and many are retiring and leaving the system and younger people are not coming into the system. You have young people that are more focused on quality of life and being on the road three weeks out of the month is not something they want to do. They can work in construction or another sector instead. The industry has to be creative and look for solutions to the driver shortage problem. In that sense, we are probably fortunate we have not been in a 4 percent GDP environment, because of the capacity situation. There is also going to be an element of transportation inflation, because equipment costs have risen sharply in the last five years and driver pay is going up and so is fuel. The cost inputs for asset-based carriers are really going to go through the roof and you add to that a shortage of capacity that leads to pricing power, it is going to lead to a bit of a shock when it comes to transportation pricing.

About the Author

Jeff BermanGroup News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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